Original author: Kaori, BlockBeats
After a recent bull market correction, ETH prices have once again risen above 3900 dollars. Looking back at Ethereum's development over the past year, there are many complex factors and emotions. On one hand, the Cancun upgrade was successfully completed, and the spot ETF was officially approved, ushering in a new phase of the bull market in terms of technology and fundamentals; on the other hand, with Bitcoin, SOL, and BNB breaking historical highs one after another, ETH's price still hovers around the 4000 dollar mark.
From the ETH price chart above, it can be seen that Ethereum has gone through three major stages this year, with the rises in each stage corresponding to different reasons. At the beginning of the year, the approval of the Bitcoin spot ETF led to Ethereum's price rising with market sentiment, briefly surpassing 4100 dollars, but by the end of March, it began to decline with the broader market. Additionally, due to the strong rise of SOL and its ecosystem, the Ethereum ecosystem faced significant liquidity outflows.
In May, the Ethereum spot ETF was approved, and the price briefly surged, but demand has not been as strong as Bitcoin. The initial market reaction to the launch of the Ethereum ETF was negative because speculative investors who bought Grayscale’s Ethereum Trust and expected it to convert to an ETF took profits, resulting in an outflow of 1 billion dollars, putting downward pressure on Ethereum's price. Additionally, the narrative of Ethereum leaning towards sci-tech products is less likely to impress traditional markets compared to Bitcoin's 'digital gold,' and the SEC's prohibition of Ethereum spot ETFs from involving staking functions has objectively weakened its appeal.
Following this, the Ethereum Foundation, re-staking ecology, and disputes over the roadmap followed, leading Ethereum to a dark period.
In November, with the dust of the U.S. elections settled, the pro-crypto Republican Party and Trump brought stronger confidence and liquidity injection to the entire crypto ecosystem, leading Ethereum to welcome its third wave of growth this year. However, this rise is different from the past, as institutional players have made their intentions clear and the improvement in liquidity fundamentals indicates what institutions recognize and favor; Ethereum is destined to continue its original intention as the 'World Computer.'
Improvement in liquidity fundamentals
Since December, Ethereum spot ETFs have seen a net inflow of over 2.2 billion dollars for half a month. Nate Geraci, president of The ETF Store, stated on social media that advisors and institutional investors have only just begun to pay attention to this field.
In the third quarter of this year, banks such as Morgan Stanley, JPMorgan, and Goldman Sachs significantly increased their holdings of Bitcoin ETFs, with quarterly holdings nearly doubling. However, their investment scope is not limited to Bitcoin; according to the latest 13F filings, these institutions have also begun purchasing Ethereum spot ETFs since then.
Moreover, in the first two quarters, the investment committees of Wisconsin and Michigan purchased Bitcoin spot ETFs, and Michigan further bought over 13 million dollars worth of Ethereum spot ETFs in the third quarter. This indicates that pension funds, which symbolize low-risk preferences and long-term investments, not only recognize Bitcoin as a digital store of value but also value Ethereum's growth potential.
At the beginning of the Ethereum spot ETF's approval, JPMorgan pointed out in a report that the demand for Ethereum spot ETFs would be far lower than that for Bitcoin spot ETFs. However, the report anticipated that the remaining months of this year would attract up to 3 billion dollars in net inflows to the spot Ethereum ETF, and if staking is allowed, this figure could rise to 6 billion dollars.
Jay Jacobs, head of U.S. thematic and active ETFs at BlackRock, stated at the 'ETFs in Depth' conference that 'our exploration of Bitcoin, especially Ethereum, is just the tip of the iceberg, with only a very small number of clients holding (IBIT and ETHA), so our current focus is on this aspect, rather than launching new altcoin ETFs.'
In a survey conducted by Blockworks Research, the vast majority (69.2%) of respondents currently hold ETH, with 78.8% being investment firms or asset management companies. This indicates that driven by revenue generation and contributions to network security, institutional participation in ETH staking has reached a critical mass.
Institutions are actively participating in ETH staking, but the level and methods of participation vary. The uncertainty of regulation has led to different attitudes among parties, with some institutions acting cautiously while others are less concerned, and institutional participants have a high awareness of the operations and risks associated with staking.
Trend Reversal
Since the FTX crash, Coinbase, Kraken, Ripple, and others have faced severe crackdowns from U.S. regulatory agencies such as the SEC. Many crypto projects are unable to open accounts with mainstream American banks. In the last bull cycle, traditional financial institutional investors who entered via DeFi also suffered significant losses. Large funds such as Toma Bravo, Silver Lake, Tiger, and Cotu not only faced setbacks with FTX but also invested at high valuations in some crypto projects that failed to deliver on their grand promises; funds have yet to return.
In the second half of 2022, many DeFi projects were forced to relocate outside the U.S. According to Alliance DAO co-founder qw, 'Two years ago, about 80% of compliant crypto startups were based in the U.S. However, this proportion has been continuously declining, and is currently only about 20%.
However, on November 6, Trump's victory turned on the green light that the U.S. financial system has been waiting for.
Trump Saves the Crypto Circle
Trump's victory undoubtedly cleared regulatory clouds for institutional adoption.
After establishing the Department of Government Efficiency, directly gathering a series of Wall Street financial elites such as Musk, Peter Thiel, and Marc Andreessen under its umbrella, and appointing Paul Atkins as the SEC chairman, Trump then appointed PayPal co-founder David Sacks as the 'White House Head of AI and Cryptocurrency Affairs.' A series of measures indicate that Trump is likely to create a government with relaxed crypto regulations.
JPMorgan analysts indicated that several stalled cryptocurrency bills may receive swift approval after Trump's election, including the (21st Century Financial Innovation and Technology Act) (FIT21), which could provide much-needed regulatory clarity for the crypto industry by clearly defining the regulatory responsibilities of the SEC and CFTC. They also stated that as the regulatory framework becomes clearer, the SEC's strategy of increasing enforcement might evolve into a more collaborative approach, and its restrictions on banks holding digital assets (Staff Accounting Bulletin No. 121) (SAB 121) could be repealed.
The high-profile lawsuits against companies like Coinbase may also be eased, settled, or even withdrawn. Regulatory notices sent to companies like Robinhood and Uniswap may be reconsidered, thereby reducing the litigation risks for the broader cryptocurrency industry.
In addition to departmental and bill reforms, the Trump team is also considering significant cuts, mergers, or even the elimination of major banking regulatory agencies in Washington. Insiders revealed that Trump’s advisors inquired during interviews with potential banking regulators whether certain personnel from the Department of Government Efficiency could be dismissed, including questions about the Federal Deposit Insurance Corporation (FDIC). Trump’s advisors also asked about potential candidates for the FDIC and the Office of the Comptroller of the Currency. Additionally, they proposed plans to merge or completely reform the FDIC, the Office of the Comptroller of the Currency, and the Federal Reserve.
As policy dividends gradually unfold, larger institutional funds in the U.S. market are expected to return to the crypto market.
DeFi Revival Ongoing
Family offices, endowment funds, pension plans, and other more stable capital not only will invest in Ethereum spot ETFs but will also re-enter the DeFi field that has been validated in the previous cycle.
Compared to 2021, the total supply of stablecoins has reached its highest level, and in the month following Trump's victory, the total amount of stablecoins has increased by nearly 25 billion dollars, with the current total market value of stablecoins reaching 202.2 billion dollars.
Coinbase, as the leader of U.S. crypto-listed companies, has made strides in the DeFi field this year, not only politically contributing funds but also serving as the largest crypto ETF custodian and launching cbBTC.
Due to cbBTC facing the same custodial and counterparty risks as most Bitcoin ETFs, some traditional financial institutions may reassess whether to continue paying fees to hold Bitcoin ETFs and instead participate in the DeFi ecosystem at almost zero cost. This shift could bring funding inflows to market-tested DeFi protocols, especially in cases where the yields offered by DeFi are more attractive compared to traditional finance.
Another major DeFi sector in this cycle is RWA. In March of this year, BlackRock officially entered the RWA track by issuing the tokenized fund BUIDL (BlackRock USD Institutional Digital Liquidity Fund) in partnership with the U.S. tokenization platform Securitize, making a very high-profile move. Capital giants like Apollo and Blackstone, which control large pools of funds, are also beginning to prepare to enter this market, bringing a significant influx of liquidity.
After the Trump family launched the DeFi project, compliant DeFi has been a hot topic. Established Ethereum blue-chip DeFi projects like Uniswap, Aave, and Lido immediately reacted to Trump's victory, surging past previous highs, while up-and-coming DeFi projects like COW, ENA, and ONDO also reached new highs.
Meanwhile, the Trump-backed DeFi project WLFI has been actively trading Ethereum-related tokens, exchanging 5 million USDC for 1325 ETH in multiple transactions, after which its multi-signature address bought 10 million dollars worth of ETH, 1 million dollars worth of LINK, and 1 million dollars worth of AAVE. Recent news of whales increasing their ETH holdings suggests that both institutions and whale accounts are refocusing on the Ethereum ecosystem.
WLFI multi-signature address holding information
Recently, the performance of new and old projects in the DeFi track has spoken for itself in terms of price. Currently, the Total Value Locked (TVL) in DeFi is about 100 billion dollars, while the total value of cryptocurrencies and related assets is around 4 trillion dollars, with only 2% of the funds truly active in the DeFi field, which is still small compared to the overall size of the cryptocurrency market. This indicates that under a warming regulatory environment, DeFi still has significant growth potential.
Aave is a typical beneficiary of this round of 'capital influx.' Its price had already broken out before Trump's victory, after which its TVL and revenue saw explosive growth: TVL surpassed the historical high of 22 billion dollars set in October 2021; the token price rose from a low of 80 USDT this year, surpassing the March high of 140 USDT in early September, and accelerating upward by the end of November; the protocol's total daily revenue exceeded the second-highest peak in September 2021, with weekly revenue hitting a new historical high.
Although Aave recently upgraded to V4, the innovation momentum on a technical level may not be sufficient to support such a large-scale rise. Regulatory and capital-driven dynamics are clearly more important, and this momentum may even spill over to the NFT sector, which also gained institutional favor in the previous cycle.
The Future of Ethereum
However, Ethereum faced a series of controversies and discussions related to ecological development this year. With the rise of Solana, both new and old public chains are starting to seize Ethereum's developers and user base, causing the ecosystem to shake, and Ethereum seems to have forgotten its original goal. As the first blockchain to create smart contracts, Ethereum successfully attracted institutional investors in the last cycle through its first-mover advantage. Whether in DeFi, blockchain games, NFTs, or the metaverse, they cannot escape the Ethereum ecosystem, and its original intention of being the 'World Computer' has deeply resonated.
Although the liquidity fundamentals of Ethereum have seen optimistic improvements, looking at Ethereum itself, its daily average transaction numbers, Gas fees, active address counts, and other on-chain data indicators have not shown significant growth. This indicates that Ethereum's on-chain activity has not risen in tandem with its price, and block space remains excessive.
Ethereum Gas Fee Level
In recent years, Ethereum has focused on building the infrastructure for cryptocurrency, providing the market with a large amount of affordable block space. This initiative has improved Dapp access performance to blocks and reduced transaction costs for L2 scaling solutions. However, due to insufficient market liquidity and sluggish trading demand, Ethereum's vast block space has not been fully utilized.
However, in the long run, this is not truly a problem. As mentioned earlier, institutional funds are gradually flowing back, and are even beginning to create dedicated blockchain use cases. For Ethereum, which has security and flexible architecture, B2B is precisely its advantage. It not only has an overwhelming advantage in security but can also accommodate numerous EVM projects, providing developers with an almost 'unfireable' option.
The long-term value of Ethereum will depend on the scarcity of its block resources, which is the actual and sustained demand for Ethereum's block settlement in the world. As institutions and applications continue to flood in, this scarcity will become increasingly prominent, thus establishing a more solid value foundation for Ethereum. Ethereum is a world computer for institutions; starting from DeFi, institutions will address the issues of Ethereum's block oversupply and roadmap disputes in the future.
At the beginning of December, Ethereum researcher Jon Charbonneau wrote a lengthy article analyzing why Ethereum needs a clearer 'North Star' goal, also suggesting that Ethereum's ecological strength should be focused on the 'World Computer', much like Bitcoin's 'Digital Gold' and Solana's 'On-chain Nasdaq'.
Ten years have passed, and Ethereum is no longer in its startup phase. The future of Ethereum is already clear for the next decade.
